Final Results
Zotefoams PLC
06 March 2007
Tuesday 6 March 2007
Preliminary Results for the Year Ended 31 December 2006
Strong underlying performance
Zotefoams plc, which manufactures and sells high-performance foams, announces
its preliminary results for the 12 months ended 31 December 2006.
The Company's foams are made by a unique process and are used in a wide variety
of applications worldwide. In 2006, Zotefoams continued investment in high
performance products under the ZOTEK(R) brand name complementing our strengths
in polyolefin foams. ZOTEK(R) foams can be used in a wider range of
applications due to their flammability and temperature performance, light weight
and good chemical resistance. As such, ZOTEK(R) foams are targeted at highly
technical and demanding applications in markets such as aerospace,
pharmaceutical, semi-conductor and chemical processing thereby broadening the
sales base outside of the traditional applications in such areas as sport and
leisure, premium packaging, building, automotive and industrial goods.
Financial Highlights
• Revenue of £30.1 million (2005: £28.0 million), up 7%
• Operating profit* of £2.8 million (2005: £2.0 million), up 40%
• Profit before tax* of £2.7 million (2005: £1.8 million), up 45%
• Gross margin of 26% (2005: 23%)
• Cash generated from operations of £4.7 million (2005: £4.1 million), up 16%
• EPS excluding exceptional items was 5.4p (2005: 3.5p), up 54%
• EPS including exceptional items was 3.4p (2005: 6.7p)
• Proposed final dividend of 3.0p per share making a total for 2006 of
4.5p (2005: 4.5p)
*Excludes an exceptional charge of £1.1 million in 2006 for costs incurred in
terminating commercial relationships with the Sekisui Group and an exceptional
gain of £1.4 million in 2005
Operational Highlights
• Strong overall sales growth, particularly in continental Europe;
• Direct sales team in place after termination of a major distribution
and agency agreement;
• A number of new higher-margin, high-performance ZOTEK(R) products
launched, with orders for these products in 2007 already exceeding total
sales for 2006.
Commenting on the results, Nigel Howard, Chairman, said:
'Zotefoams' strategy is to create sustained profit growth by expanding its sales
internationally and by broadening its potential market with unique new products.
Trading in the first two months of 2007 is in line with our expectations.
Compared with 2006 foreign exchange rates have moved adversely for our business
and these will impact our profitability in 2007. However, our expectation is
for continued profit growth as the combination of a solid foundation in
polyolefin foams combined with the very encouraging signs from our
high-performance polymers offer exciting prospects for the future.'
Enquiries:
Zotefoams plc Tel Today: 020 7831 3113
David Stirling, Managing Director Thereafter: 020 8664 1600
Clifford Hurst, Finance Director
Financial Dynamics Tel: 020 7831 3113
Ben Brewerton
INTRODUCTION
During 2006 we grew profit before tax and exceptional items by 45% to £2.67m
(2005: £1.84m) and sales increased 7% to £30.05m (2005: £27.98m). We
restructured the worldwide sales and marketing of polyolefin foams terminating a
major agency and distribution agreement and investing in additional dedicated
sales staff in Europe and Asia. In high-performance polymers we have made good
progress in product and business development providing exciting prospects for
the future.
We intend to grow sales in our core polyolefin business in excess of the rate of
inflation in Europe and achieve double digit percentage growth in North America
and Asia. Our sales growth in America is supported by our factory in Kentucky
which opened in mid-2001 while in Asia we will consider a similar operation,
either under a license or as a joint venture, as sales increase to a level where
such an investment is sensible. We are also committed to developing a portfolio
of unique foam products from high-performance materials which will enjoy
significant advantages over competitive materials. This will allow higher
margins for Zotefoams and confirm our position as the pre-eminent foam
technology company. We intend to achieve this growth while continuing to improve
our operating margins and our return on capital employed.
Outlook
Trading in the first two months of 2007 is in line with our expectations.
Compared with 2006 foreign exchange rates have moved adversely for our business
and these will impact our profitability in 2007. However, our expectation is
for continued profit growth as the combination of a solid foundation in
polyolefin foams combined with the very encouraging signs from our
high-performance polymers offer exciting prospects for the future.
BUSINESS REVIEW
Zotefoams plc is the world's leading manufacturer of cross-linked block foams.
Its products are used in a wide range of markets including sports and leisure,
packaging, transport, healthcare, building, marine and the military.
Through a unique production process, the Company produces foams which have
controlled properties and are of a strength, consistency, quality and purity
superior to foams produced by other methods.
Business Overview
Zotefoams considers its business falls into two distinct categories: polyolefin
foams and high-performance polymers.
Both businesses rely on our unique production process which uses nitrogen gas at
high temperature and pressure to foam solid plastics.
Polyolefin foams are mainly made from polyethylene which, when foamed, produces
a versatile material used in a wide variety of applications. Typically our
products are sold to foam converters who process the foam by a variety of
techniques such as cutting, welding, moulding and routing into finished or
semi-finished parts based on end-user requirements. The benefits of Zotefoams'
products are evident at both foam processors and end-users and include purity,
consistency of processing, good performance to weight ratio and aesthetics. Key
to growing this business successfully is close relationships with the converters
combined with business development activities at end-users to highlight the
benefits of our materials and track industry trends for future development.
High-performance polymers use the processing technology developed for polyolefin
foams applied to other materials. This is an emerging business which offers an
improved return on capital in new business segments. We have developed, patented
and launched world leading products made from fluoropolymer and nylon which are
branded ZOTEK(R) our high-performance foams trademark. These foams are targeted
at highly technical and demanding applications in markets such as aerospace,
pharmaceutical, semi-conductor and chemical processing and market development
lead times are long. Timing of revenue generation is therefore difficult to
predict.
Strategy and Objectives
Zotefoams' strategy is to grow our existing business in polyolefin foams while
developing a portfolio of high-performance polymers. We will seek to profitably
grow the business through a combination of organic growth in both polyolefin and
high-performance polymers and acquisitions or partnership deals in related
technologies, products or markets.
Our stated objectives are:
1. Grow sales in our polyolefin business in excess of the rate of inflation in
Europe and achieve double digit percentage growth in North America and Asia.
2. Develop a high-performance polymers portfolio to deliver enhanced margins.
3. Improve our operating margins.
4. Improve our return on capital employed.
Performance in 2006 against these objectives was:
1. Sales performance was as follows:
a. Sales in the UK and Europe grew by 10% which was significantly above
the average inflation rate;
b. Sales in North America grew 4% in constant currency which was below
our expectations due to a slow-down in the US economy in the second
half of 2006; and
c. Sales in Asia declined slightly. We view 2006 as a year of transition,
exiting a regional distribution agreement and forming more direct
relationships with foam converters and end-users. While we believe
that Asia offers significant potential for growth, we anticipate that
currently the best opportunities lie in more niche, higher
added-value products and we are focusing our resources here.
2. Sales of high-performance polymers in 2006 were similar to 2005 with
substantial progress made in three areas:
a. We developed and launched three promising variants of our ZOTEK(R) F
fluoropolymer foams in response to market feedback;
b. We developed and launched a world first nylon foam, ZOTEK(R) N,
designed for areas where higher temperature performance is critical;
and
c. Our business development activities should result in a significant
uplift in demand during 2007, with confirmed orders received already
in excess of 2006 sales.
3. Group operating margins, pre-exceptional items, improved from 7% to 9% of
sales revenue.
4. Pre-tax return on capital employed, pre-exceptional items, increased from 7%
to 11%.
Financial Results
Group turnover increased by 7% to £30.05m (2005: £27.98m) and profit before tax
and exceptional items increased by 45% to £2.67m (2005: £1.84m).
Our sales growth resulted from a 5% increase in volumes shipped along with the
positive impact of price rises in all our major markets offset, particularly in
the second six months of the year, by somewhat adverse foreign exchange rates.
On 21 March 2006 we announced the termination of the Group's commercial
relationships with the Sekisui Chemical Company Ltd and subsidiaries ('Sekisui')
which sold Zotefoams' polyolefin products as an agent in Continental Europe and
North America and as a distributor in Asia. The costs of this termination are
shown as an exceptional charge of £1.10 million.
Group gross profit margin increased to 26% of sales revenue (2005: 23%), despite
an 11% rise in basic polymer prices and a 26% increase in energy costs compared
with last year, with benefits from commission savings following the termination
of the Sekisui relationship and better operational efficiency.
Distribution costs increased by 11% as we increased our own sales resources
following the termination of the commercial agreement with Sekisui.
Administrative expenses include a foreign exchange loss of £147,000 (2005: gain
of £111,000).
The overall effective tax rate is 23% (2005: 26%) as shown in note 6.
Earnings per share and Dividend
Group earnings per share after exceptional items were 3.4p (2005: 6.7p). The
Directors are recommending the final dividend is maintained at 3.0p per share
payable on 24 May 2007 to shareholders on the Company register at 27 April 2007.
This would bring the total dividend to 4.5p per ordinary share for the year
(2005: 4.5p).
Cash flow
Cash generated from operations was £4.72m (2005: £4.06m). Capital expenditure of
£2.64m was higher than in recent years with the refurbishment of one of our
large high-pressure vessels and the purchase of a nylon extruder. After the
dividend payment of £1.63m this left us with a cash outflow of £0.36m,
increasing net debt to £1.43m (2005: £1.07m). Gearing remains low at 6% (2005:
4%).
Markets and Operations
In 2006 overall sales grew 7% to £30.05m (2005: £27.98m).
Our high-performance polymers are unique foams for technically demanding
requirements. They offer properties such as improved chemical, flammability or
temperature performance compared to other foam materials. The applications for
these products are often much larger in value than a typical polyolefin foam
application, however the performance requirements and test conditions are very
demanding and evaluation can take many months or sometimes years. Therefore the
inherent uncertainty of such projects, particularly their timing and the unique
requirements of specific applications which will vary from project to project,
makes projecting revenues and success rates extremely difficult, especially at
this early stage of their development. In 2006 high-performance polymers
accounted for 2% of Group sales. We continued to increase both technical and
marketing resource, the additional investment appropriate to the potential size
and profitability of this segment, and during the year good progress was made on
the launch of new grades and development of applications, particularly in the
aerospace and high-performance insulation markets.
The polyolefin foams business grew to £29.56m (2005: £27.42m). The UK, which we
generally regard as our most mature market, performed well with a 3% sales
increase. Continental Europe, which required the most significant sales team
restructuring after the termination of the Sekisui relationship, grew 14% with
particularly pleasing growth in Germany, Italy and the Benelux markets. North
America, which was affected by a weak economy in the second six months, grew by
4%
The termination of the Sekisui relationship in polyolefin foams marked a
significant change in Zotefoams' approach to our customers in Europe and, on a
smaller scale, in Asia. We have now completed the recruitment and training of a
direct sales organisation across all product lines worldwide which is giving us
better visibility and influence over business development activities in many
markets. We expect the termination cost of £1.10 million, which is shown as an
exceptional charge, and the ongoing costs of establishing and operating our own
sales team will be more than offset by the end of 2007 through a reduction in
commissions payable to the Sekisui Group.
At our Croydon site we continue to invest to enhance both production capacity
and capability. During 2006 we spent £2.64m on capital expenditure. Major
projects included installing a new extrusion line to support the launch of our
ZOTEK(R) N nylon foams and completing the refurbishment and upgrade of one of
our large high-pressure vessels where we had discovered corrosion. This reduces
to approximately 26% the proportion of our high-pressure capacity which operates
on a water-cooling mechanism where corrosion may be present and as part of an
ongoing programme to address this we are currently refurbishing a further vessel
which is due to be re-instated during the second half of 2007.
Consolidated income statement
for the year ended 31 December 2006
2006
Pre- Exceptional Post-
exceptional items exceptional
items (see note 4) items
Note £000 £000 £000
______ ______ ______
Revenue 2 30,052 - 30,052
Cost of sales (22,257) - (22,257)
______ ______ ______
Gross profit 7,795 - 7,795
Distribution costs (2,117) - (2,117)
Administrative expenses (2,842) (1,074) (3,916)
______ ______ ______
Operating profit 2,836 (1,074) 1,762
Financial income 5 884 - 884
Finance costs 5 (1,047) - (1,047)
______ ______ ______
Profit before tax 2,673 (1,074) 1,599
Taxation 6 (682) 322 (360)
______ ______ ______
Profit for the year 3 1,991 (752) 1,239
______ ______ ______
Attributable to:
Equity holders of the parent 1,991 (752) 1,239
______ ______ ______
Earnings per share
Basic (p) 7 3.4
______
Diluted (p) 7 3.4
______
Consolidated income statement
for the year ended 31 December 2006 (continued from table above)
2005
Pre- Exceptional Post-
exceptional items exceptional
items (see note 4) items
Note £000 £000 £000
______ ______ ______
Revenue 2 27,975 - 27,975
Cost of sales (21,640) - (21,640)
______ ______ ______
Gross profit 6,335 - 6,335
Distribution costs (1,905) - (1,905)
Administrative expenses (2,407) 1,449 (958)
______ ______ ______
Operating profit 2,023 1,449 3,472
Financial income 5 813 - 813
Finance costs 5 (997) - (997)
______ ______ ______
Profit before tax 1,839 1,449 3,288
Taxation 6 (569) (292) (861)
______ ______ ______
Profit for the year 3 1,270 1,157 2,427
______ ______ ______
Attributable to:
Equity holders of the parent 1,270 1,157 2,427
______ ______ ______
Earnings per share
Basic (p) 7 6.7
______
Diluted (p) 7 6.7
______
Consolidated statement of recognised income and expense
for the year ended 31 December 2006
2006 2005
£000 £000
______ ______
Foreign exchange translation differences on investment in foreign subsidiary (905) 846
Effective portion of changes in fair value of cash flow hedges net of recycling 163 (79)
Actuarial gains/(losses) on defined benefit schemes 426 (42)
Tax on items taken directly to equity (159) 13
______ ______
Net (expense)/income recognised directly in equity (475) 738
Profit for the year 1,239 2,427
______ ______
Total recognised income and expense for the year 764 3,165
______ ______
Attributable to equity holders of the parent 764 3,165
______ ______
Consolidated balance sheet
as at 31 December 2006
2006 2005
Note £000 £000
______ ______
Non-current assets
Property, plant and equipment 27,018 28,364
Deferred tax assets 99 132
______ ______
Total non-current assets 27,117 28,496
Current assets
Inventories 3,785 3,933
Trade and other receivables 6,163 6,182
Cash and cash equivalents 82 432
______ ______
Total current assets 10,030 10,547
______ ______
Total assets 37,147 39,043
______ ______
Equity
Issued share capital (1,816) (1,816)
Share premium (13,753) (13,753)
Capital redemption reserve (5) (5)
Translation reserve 635 (270)
Hedging reserve (84) 79
Retained earnings (9,815) (9,857)
______ ______
Total equity attributable to the equity holders of the Company (24,838) (25,622)
______ ______
Non-current liabilities
Interest-bearing loans and borrowings (700) (1,100)
Employee benefits 9 (4,240) (5,220)
Deferred tax liabilities (2,764) (2,730)
______ ______
Total non-current liabilities (7,704) (9,050)
Current liabilities
Interest-bearing loans and borrowings (400) (400)
Bank overdraft (411) -
Tax payable (307) (698)
Trade and other payables (3,487) (3,273)
______ ______
Total current liabilities (4,605) (4,371)
______ ______
Total liabilities (12,309) (13,421)
______ ______
Total equity and liabilities (37,147) (39,043)
______ ______
Consolidated cash flow statement
for the year ended 31 December 2006
2006 2005
£000 £000
______ ______
Cash flows from operating activities
Profit for the year 1,239 2,427
Adjustments for:
Depreciation, amortisation and impairment 3,251 3,322
Financial income (884) (813)
Financial expense 1,047 997
Equity-settled share-based payments 64 (14)
Taxation 360 861
______ ______
Operating profit before changes in working capital and provisions 5,077 6,780
Increase in trade and other receivables (107) (346)
Decrease/(increase) in inventories 51 (704)
Increase in trade and other payables 314 334
Decrease in provisions and employee benefits (619) (2,003)
______ ______
Cash generated from the operations 4,716 4,061
Interest paid (126) (151)
Tax paid (823) (713)
______ ______
Net cash from operating activities 3,767 3,197
Proceeds on disposal of property, plant and equipment 3 -
Interest received 8 26
Acquisition of property, plant and equipment (2,641) (1,070)
______ ______
Net cash used in investing activities (2,630) (1,044)
______ ______
Proceeds from the issue of share capital - 49
Repayment of borrowings (400) (400)
Payment of finance lease liabilities - (57)
Dividends paid (1,634) (1,631)
______ ______
Net cash used in financing activities (2,034) (2,039)
______ ______
Net (decrease)/increase in cash and cash equivalents (897) 114
Cash and cash equivalents at 1 January 432 298
Effect of exchange rate fluctuations on cash held 136 20
______ ______
Cash and cash equivalents at 31 December (329) 432
______ ______
Cash and cash equivalents comprise cash at bank and short-term highly liquid
investments with a maturity date of less than three months.
Notes to the financial statement
1. Accounting policies
Zotefoams plc (the 'Company') is a Company incorporated in Great Britain.
The Group financial statements consolidate those of the Company and its
subsidiaries (together referred to as the 'Group').
The Group financial statements have been prepared and approved by the Directors
in accordance with International Financial Reporting Standards as adopted by the
EU ('Adopted IFRS').
The financial information does not constitute the Company's statutory accounts
for the year ended 31 December 2006 or 2005 but is derived from those accounts.
Statutory accounts for 2005 have been delivered to the Registrar of Companies,
and those for 2006 will be delivered following the Company's Annual General
Meeting. The auditors have reported on those accounts; their reports were
unqualified and did not contain statements under Section 237 (2) or (3) of the
Companies Act.
2. Segment reporting
The Group manufactures and sells high-performance foams for specialist markets
worldwide. These fall into two main business segments best categorised by their
constituent raw materials.
• Polyolefins: these foams are made from olefinic homopolymer and copolymer
resin. The most common resin used is polyethylene.
• High-performance polymers (HPP): these foams exhibit high-performance on
certain key properties, such as improved chemical, flammability or
temperature performance, due to the resins on which they are based.
Turnover in the segment is currently mainly derived from our ZOTEK(R) F
foams made from PVDF fluoropolymer. Other polymers either commercially
launched or being assessed in development include polyamide (nylon) and
silicone.
Due to our unique manufacturing technology Zotefoams can produce polyolefin
foams with superior performance to other manufacturers. However, our strategy is
to use the capabilities of our technology to produce foams from other materials
as well as polyolefins. The development of foams from high-performance polymers
business is currently in its early stages with costs (including the technical
and marketing costs to develop these materials) exceeding revenues.
Polyolefins HPP
2006 2005 2006 2005
Note £000 £000 £000 £000
______ ______ ______ ______
Revenue 29,558 27,420 494 555
Pre-exceptional profit/(loss) 3,369 2,219 (533) (196)
Exceptional items 4 (1,074) - - -
______ ______ ______ ______
Post-exceptional profit/(loss) 2,295 2,219 (533) (196)
Net financing costs
Taxation
Profit for the period
Segment assets 35,716 38,026 1,332 885
Unallocated assets - - - -
______ ______ ______ ______
Total assets
Segment liabilities (9,123) (9,752) (115) (241)
Unallocated liabilities - - - -
______ ______ ______ ______
Total liabilities
Depreciation 3,188 3,272 63 50
Capital expenditure 2,287 1,053 354 17
______ ______ ______ ______
(continued from table above)
Consolidated
2006 2005
Note £000 £000
______ ______
Revenue 30,052 27,975
Pre-exceptional profit/(loss) 2,836 2,023
Exceptional items 4 (1,074) 1,449
______ ______
Post-exceptional profit/(loss) 1,762 3,472
Net financing costs (163) (184)
Taxation (360) (861)
______ ______
Profit for the period 1,239 2,427
Segment assets 37,048 38,911
Unallocated assets 99 132
______ ______
Total assets 37,147 39,043
Segment liabilities (9,238) (9,993)
Unallocated liabilities (3,071) (3,428)
______ ______
Total liabilities (12,309) (13,421)
Depreciation 3,251 3,322
Capital expenditure 2,641 1,070
______ ______
Geographical segments
UK and Eire Europe North America
£000 £000 £000
For the year ended 31 December 2006
Revenue from external customers 7,543 14,391 7,504
Segment assets 29,746 - 7,401
Capital expenditure 2,574 - 67
For the year ended 31 December 2005
Revenue from external customers 7,332 12,604 7,336
Segment assets 29,876 - 9,167
Capital expenditure 1,046 - 24
(continued from table above)
Rest of the World
£000 Total
______ ______
For the year ended 31 December 2006
Revenue from external customers 614 30,052
Segment assets - 37,147
Capital expenditure - 2,641
______ ______
For the year ended 31 December 2005
Revenue from external customers 703 27,975
Segment assets - 39,043
Capital expenditure - 1,070
______ ______
3. Expenses and auditor's remuneration
2006 2005
£000 £000
______ ______
Included in profit for the year are:
Research and development costs expensed 924 776
Net exchange losses/(gains) 147 (111)
______ ______
Auditor's remuneration:
Group - audit of these financial statements 80 84
- fees receivable by the auditor and their associates in respect of other
services:
- other services pursuant with legislation 18 39
- other services relating to taxation 5 11
- services relating to corporate finance transactions - 8
______ ______
103 142
______ ______
4. Exceptional items
The Company has classified the following items as exceptional:
Commercial agreement termination costs
Relating to the termination payment, legal, advisory and other costs to end the
commercial relationship with the Sekisui Group which was announced in March
2006.
Bid costs
Relating to legal, advisory and other costs incurred in respect of a preliminary
approach for the share capital of the Company which was announced in January
2005 and terminated in November 2005.
Pension curtailment costs
On 31 December 2005, the Zotefoams Defined Benefit Pension Scheme for UK
employees was closed to future accrual of benefits. The actuarial gain on
closing the scheme to future accrual of benefits and the associated costs have
been classified as an exceptional item.
Tax adjustment to exceptional items in prior year
In 2001 and 2002, the Group recorded an exceptional profit on insurance proceeds
following a fire in 2000 at the Group's Croydon site. The tax computations
relating to 2001 and 2002 have been agreed with the Revenue resulting in a
£267,000 release on the deferred tax provided in relation to these proceeds.
This was released as an exceptional item in 2005 because it relates to a
previous exceptional item.
2006 2005
£000 £000
______ ______
Bid costs 30 (413)
Commercial agreement termination (1,104) -
Pension curtailment:
Actuarial gain - 1,972
Associated costs borne by the Company - (110)
______ ______
Exceptional items before taxation (1,074) 1,449
Tax on above 322 (559)
Adjustment to tax on prior year exceptional item - 267
______ ______
Exceptional items after taxation (752) 1,157
______ ______
5. Finance income and costs
Financial income
2006 2005
£000 £000
______ ______
Interest on bank deposits 8 26
Expected return on assets of defined benefit pension fund 876 787
______ ______
884 813
______ ______
Finance costs
2006 2005
£000 £000
______ ______
On bank loans and overdrafts 125 120
On finance leases - 16
Interest on defined benefit pension obligation 922 861
______ ______
1,047 997
______ ______
6. Taxation
2006 2005
£000 £000
______ ______
UK corporation tax 484 917
Overseas taxation 6 2
Adjustment to prior year UK tax charge (60) (84)
______ ______
Current taxation 430 835
Deferred taxation (70) 26
______ ______
Total tax charge 360 861
______ ______
Factors affecting the tax charge
The tax charge for the period is lower (2005: lower) than the standard rate of
corporation tax in the UK of 30% (2005: 30%). The differences are explained
below:
2006 2005
£000 £000
______ ______
Tax reconciliation
Profit on ordinary activities before tax 1,599 3,288
______ ______
Tax at 30% (2005: 30%) 480 986
Effects of:
Research and development tax credits less expenses not deductable for tax (53) 115
purposes
Partial recognition of US tax losses (1) (54)
(Lower)/higher tax rates on overseas earnings (6) 15
Adjustments to tax charge in respect of previous periods (60) 66
Adjustment to tax charge on prior year exceptional items - (267)
______ ______
Total tax charge 360 861
______ ______
7. Dividends and earnings per share
2006 2005
£000 £000
______ ______
Final dividend prior year of 3.0p (2004: 3.0p) net per 5.0p ordinary share 1,087 1,087
Interim dividend of 1.5p (2005: 1.5p) net per 5.0p ordinary share 547 544
______ ______
Dividends paid during the year 1,634 1,631
______ ______
The proposed final dividend for the year ended 31 December 2006 of 3.0p per
share (2005: 3.0p) is subject to approval by shareholders at the AGM and has not
been included as a liability in these financial statements.
Earnings per ordinary share
Earnings per ordinary share is calculated by dividing profit after tax of
£1,239,000 (2005: £2,427,000) by the weighted average number of shares in issue
during the year. Diluted earnings per ordinary share adjusts for the potential
dilutive effect of share option schemes in accordance with IAS 33.
2006 2005
______ ______
Average number of ordinary shares issued 36,319,924 36,276,976
Deemed issued for no consideration 339,875 -
______ ______
Diluted 36,659,799 36,276,976
______ ______
Shares deemed issued for no consideration have been calculated based on the
potential dilutive effect of the Executive Share Option Scheme and options
granted under the HMRC Approved Share Option Scheme:
Number of shares under option
Date from which exercisable Exercise price 2006 2005
______ ______
18 March 2006 80.0p - 872,865
7 April 2007 72.5p 1,130,034 1,130,034
22 December 2008 77.0p 1,026,320 1,026,320
27 March 2009 80.5p 111,801 -
______ ______
2,268,155 3,029,219
______ ______
The average fair value of one ordinary share during the year was considered to
be 88.3p (2005: 72.0p).
8. Financial instruments
Policy
The Group does not enter into significant derivative transactions. The Group's
principal financial instruments comprise bank loans, cash and short-term
deposits. The main purpose of these financial instruments is to raise finance
for the Group's operations. It is and has been throughout the period under
review, the Group's policy that no trading in financial instruments shall be
undertaken.
The main risks arising from the Group's financial instruments are credit risk,
interest rate risk, liquidity risk and foreign exchange risk. The Board reviews
and agrees policies for managing each of these risks and they are summarised
below. These policies have remained fundamentally unchanged throughout the year.
Credit risk
Management has a credit policy in place and the exposure to credit risk is
monitored on an ongoing basis. Credit evaluations are performed on all customers
requiring credit over a certain amount. The Group does not require collateral in
respect of financial assets.
In 2006 and 2005, the Group had credit insurance to mitigate this risk. However,
not all the exposure is covered so elements of risk remain.
At the balance sheet date there were no significant concentrations of credit
risk. The maximum exposure to credit risk is represented by the carrying amount
of each financial asset, including derivative financial instruments, in the
Balance Sheet.
Interest rate risk
The Group finances its operations through a mixture of retained profits and bank
borrowings. The Group borrows in the desired currency generally at a variable
rate of interest.
The interest rate profile of the Group's borrowings at 31 December was:
Effective Fixed Variable 2006
interest rates rates Total
rate £000 £000 £000
______ ______ ______
Sterling 6% - 1,511 1,511
______ ______ ______
- 1,511 1,511
______ ______ ______
(continued from table above)
Effective Fixed Variable 2005
interest rates rates Total
rate £000 £000 £000
______ ______ ______
Sterling 6% - 1,500 1,500
______ ______ ______
- 1,500 1,500
______ ______ ______
The interest rate payable on the sterling overdraft is determined by LIBOR (or
similar) plus a bank margin.
Liquidity risk
The Group's objective is to maintain a balance of continuity of funding and
flexibility through the use of overdrafts, loans and finance leases as
applicable.
The Group has a short-term facility of £5.0 million which is freely transferable
and convertible into sterling.
This facility expires in April 2007 and is utilised by Zotefoams plc and its
subsidiary undertakings under a cross-guarantee structure.
On 25 August 2004 Zotefoams plc borrowed £2.0 million under a five year
mortgage, repayable in equal quarterly instalments. This facility is secured
over specific plant assets.
Foreign currency risk
The Group is exposed to foreign currency risk on sales, purchases, assets and
liabilities which are denominated in a currency other than sterling. The
currencies giving rise to this risk are primarily the euro and the US dollar.
The Group hedges a proportion of its estimated cash exposure in respect of trade
and other receivables, trade and other payables and forecast sales receipts and
purchase payments for the next nine months. The Group uses forward exchange
contracts to hedge its foreign currency risk. As at 31 December 2006 these
forward currency contracts covered approximately two-thirds of the estimated net
cash foreign exchange exposure for the next nine months.
In respect of other monetary assets and liabilities held in currencies other
than the euro and the US dollar, the Group ensures that the net exposure is kept
to a manageable level, by buying or selling foreign currencies at spot rates
where necessary to address short-term imbalances.
Forecasted transactions
The Group classifies its forward exchange contracts hedging forecasted
transactions as cash flow hedges and states them at fair value. The net fair
value of forward exchange contracts used as hedges of forecasted transactions at
31 December 2006 was a net asset of £84,000 (2005: net liability of £79,000)
comprising assets of £85,000 (2005: £17,000) and liabilities of £1,000 (2005:
£96,000) that were recognised in fair value derivatives in 2006.
Recognised assets and liabilities
Changes in the fair value of forward exchange contracts that economically hedge
monetary assets and liabilities in foreign currencies and for which no hedge
accounting is applied are recognised in the Income Statement. Both the changes
in fair value of the forward contracts and the foreign exchange gains and losses
relating to the monetary items are recognised as part of administrative expenses
(see note 3).
Sensitivity analysis
In managing currency risks the Group aims to reduce impact of short-term
fluctuations on the Group's earnings. Over the longer-term, however, permanent
changes in foreign exchange and interest rates would have an impact on
consolidated earnings.
Short-term fluctuations in interest rates are not hedged as the Group, at
present, does not consider them material. At 31 December 2006 it is estimated
that a general increase of one percentage point in interest rates would decrease
the Group's profit before tax by approximately £15,000 (2005: £15,000).
At 31 December 2006 it is estimated that an increase of one percentage point in
the value of sterling against the euro and the dollar and would decrease the
Group's profit before tax by approximately £30,000 (2005: £43,000) and £44,000
(2005: £45,000) respectively. The forward exchange contracts have been included
in this calculation.
The Group has significant undertakings in the USA whose revenue and expenses are
denominated in US dollars. Zotefoams plc makes a significant proportion of its
sales to European customers and these revenues are predominantly in euros. It
was the Group's policy in 2006 to hedge a proportion of the foreign currency
cash flows of invoiced sales net of expected foreign expenditure. Hedging is
achieved by the use of foreign currency contracts expiring in the month of
expected cash flow.
Fair values
The fair values together with the carrying amounts shown in the Balance Sheet
are as follows:
2006 2005
Carrying Carrying
amount Fair value amount Fair value
£000 £000 £000 £000
______ ______ ______ ______
Trade and other receivables 6,078 6,078 6,165 6,165
______ ______ ______ ______
Cash and cash equivalents (329) (329) 432 432
Forward exchange contracts
- assets 85 85 17 17
- liabilities (1) (1) (96) (96)
______ ______ ______ ______
Secured bank loans (1,100) (1,100) (1,500) (1,500)
______ ______ ______ ______
Trade and other payables (3,486) (3,486) (3,177) (3,177)
______ ______ ______ ______
Estimation of fair values
The following summarises the major methods and assumptions used in estimating
fair values of financial instruments reflected in the table.
Derivatives
Forward exchange contracts are marked to market using listed market prices.
Interest-bearing loans and borrowings and trade and other receivables/payables
Carrying amounts equals the fair value.
9. Employee benefits
The Group and Company operate one defined benefit scheme in the UK which offers
both pensions in retirement and death benefits to members. Pension benefits are
related to the members' final salary at retirement and their length of service.
Since 1 October 2001 the scheme has been closed to new members.
From 31 December 2005 future accrual of benefits for existing members of the
scheme ceased.
Contributions to the plan for the year from the Company have been agreed with
the Trustees at £50,000 per month from January 2006 to December 2010.
The Company has opted to recognise all actuarial gains and losses immediately
via the Statement of Recognised Income and Expenditure (SORIE). An actuarial
valuation of the scheme was carried out as at 5 April 2005 and the results have
been updated to 31 December 2006 by a qualified independent actuary. The major
assumptions used by the actuary were (in nominal terms) as follows:
As at As at
31 December 31 December
2006 2005
______ ______
Discount rate 5.10% 4.80%
Expected return on plan assets 6.58% 6.13%
Rate of salary increase n/a 4.40%
Rate of increase to pensions in payment 3.00% 2.80%
Rate of inflation 3.10% 2.90%
Mortality assumption 90% of PA92 90% of PA92
______ ______
The assumptions used in determining the overall expected return of the scheme
have been set with reference to yields available on government bonds and
appropriate risk margins.
The assets in the scheme and the expected rates of return were:
Long-term Long-term
rate of return Value at rate of return Value at
expected at 31 December expected at 31 December
31 December 2006 31 December 2005
2006 £000 2005 £000
______ ______ ______ ______
Equities 7.1 12,402 6.6 11,387
Bonds 4.6 2,437 4.1 1,915
Other 5.0 1,022 4.5 957
______ ______ ______ ______
15,861 14,259
Present value of defined obligation:
Funded plans (20,101) (19,479)
______ ______
Total (20,101) (19,479)
______ ______
Deficit in the scheme (4,240) (5,220)
______ ______
Related deferred tax asset 1,272 1,566
______ ______
Net pension liability (2,968) (3,654)
______ ______
Reconciliation of opening and closing balances of the present value of the
defined benefit obligation:
Benefit obligation at beginning of year 19,479 18,721
Service cost - 440
Interest cost 922 861
Contributions by plan participants - 209
Actuarial loss 233 1,621
Benefits paid (552) (401)
Past service costs 19 -
Curtailments and settlements - (1,972)
______ ______
Benefit obligation at end of year 20,101 19,479
______ ______
Reconciliation of opening and closing balances of the fair value of plan assets:
Value at Value at
31 December 31 December
2006 2005
£000 £000
______ ______
Fair value of plan assets at beginning of year 14,259 11,529
Expected return on plan assets 876 787
Actuarial gain 659 1,579
Contributions by employers 619 556
Contributions by plan participants - 209
Benefits paid (552) (401)
______ ______
Fair value of plan assets at end of year 15,861 14,259
______ ______
The amounts recognised in the Income Statement are:
Current service cost - 440
Interest on obligation 922 861
Expected return on plan assets (876) (787)
Gains on settlements and curtailment - (1,972)
Past service cost 19 -
______ ______
Total expense/(gain) 65 (1,458)
______ ______
The expense/(gain) is recognised in the following line items in the Income
Statement:
2006 2005
£000 £000
______ ______
Cost of sales 19 242
Distribution costs - 38
Administrative expenses - 160
Financial income (876) (787)
Finance costs 922 861
Exceptional gain in administrative expenses - (1,972)
______ ______
65 (1,458)
______ ______
Actuarial gains/(losses) shown in SORIE since 1 January 2004:
2006 2005
£000 £000
______ ______
Balance as at 1 January 222 264
Actuarial gains/(losses) 426 (42)
______ ______
Balance as at 31 December 648 222
______ ______
History of scheme assets, obligations and experience adjustments
As at As at As at
31 December 2006 31 December 2005 31 December 2004
______ ______ ______
Present value of defined benefit obligation 20,101 19,479 18,721
Fair value of scheme assets 15,861 14,259 11,529
Deficit in the scheme (4,240) (5,220) (7,192)
Experience adjustments arising on scheme liabilities 233 1,621 93
Experience item as a percentage of scheme liabilities 1% 8% 0%
Experience adjustments arising on scheme assets 659 1,579 299
Experience item as a percentage of scheme assets 4% 11% 3%
______ ______ ______
Other pension schemes
On 1 January 2006 a separate stakeholder scheme was set up for those employees
who were originally in the closed defined benefit scheme. The contributions paid
by the Company in 2006 were £534,000 (2005: nil).
In addition to this scheme, Zotefoams plc operates a stakeholder scheme which is
open to employees who joined after 1 October 2001. The contributions paid by the
Company in 2006 were £20,000 (2005: £12,000).
For US based employees Zotefoams Inc. operates a 401(k) plan. The contributions
paid by Zotefoams Inc in 2006 were £85,842 (2005: £106,000).
This information is provided by RNS
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Friday, 10th January 2025
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